Cryptocurrencies have rapidly evolved from novelties to trillion-dollar disruptors in just a few years. Bitcoin and other digital assets are now investments and means of transaction for various goods and services. Advocates believe these digital currencies democratize money, challenging traditional financial control. However, there are those who argue that the lack of regulation empowers criminal groups and the assets exacerbate inequality, facing volatile markets and high energy consumption.
Global regulations vary, with some countries embracing cryptocurrencies while others restrict them. As of February 2023, 114 countries, including the US and a number of African countries, are considering their own central bank digital currencies (CBDCs) to rival the crypto boom. Cryptocurrencies remain a fascinating, controversial force reshaping the future of money and finance worldwide.
Why Should African Central Banks Consider Digital Currency
Digital financial transactions are becoming more prevalent as people transition away from cash. Banks and financial institutions now process more transactions digitally than traditional physical in-visits.
The gaming industry has witnessed the integration of blockchain-based digital assets to allow players to buy, sell and trade in-game items with real-world value. This has led to the rise of blockchain gaming platforms and virtual economies.
The e-commerce industry has quickly integrated cryptocurrencies as an alternative payment method, providing customers more flexibility and privacy. Some major online retailers and marketplaces now accept digital currencies, thus expanding their global customer base and facilitating international transactions.
Additionally, online casinos are also getting in on the act. For instance, new users can enjoy a no deposit bonus, place wagers and withdraw winnings in the form of cryptocurrencies. The travel and hospitality industry has also embraced cryptocurrencies, with some airlines, hotels and travel agencies accepting them for bookings.
There is also a great deal of potential for digital currencies to improve the status of African economies and financial systems in a number of ways. This includes:
1. Enhancing Financial Inclusion
CBDCs could bring financial services to people who previously didn’t have bank accounts, especially if designed for offline use. In remote areas without internet access, digital transactions can be made at little or no cost using simple feature phones. Countries such as South Africa, Ghana and Nigeria have already run pilots on CBDCs
CBDCs can also distribute targeted welfare payments, especially during sudden crises such as a pandemic or natural disaster.
2. Mitigating Currency Volatility
According to an IMF publication on the future of inflation, Central Bank Digital Currencies (CBDCs) can play a vital role in mitigating currency volatility in African economies. By transitioning to an “electronic money standard,” it becomes possible to achieve a world with lower inflation and, in some cases, even zero inflation.
This transition involves eliminating the zero lower bound, which can be achieved using existing tools available to central banks. The central banks restore full employment more quickly, and over the medium term, work towards achieving full price stability with zero inflation, fostering economic growth and stability.
3. Facilitating Cross-Border Transactions
A public platform for cross-border payments could facilitate trading digital representations of domestic central bank reserves among banks and regulated financial institutions. This would allow participants to trade safe central bank reserves without the need for individual regulation by each central bank or major changes to national payment systems.
The platform’s single ledger and programmability would enable simultaneous currency exchanges, minimizing risks and allowing for risk-sharing contracts, automated auctions, and streamlined capital flow limits. Additionally, encryption features would ensure compliance with anti-money laundering requirements while maintaining anonymity for bidding on the platform, promoting efficient and secure cross-border transactions.
4. Combating Illegal Activities
By adopting CBDCs, financial transactions can be traced and recorded on a secure and immutable blockchain, making it more challenging for criminals to operate undetected.
With a clear record of all transactions, law enforcement agencies and regulatory bodies can investigate suspicious activities efficiently. This increased level of transparency can create a safer and more secure financial environment for citizens and businesses.
5. Reducing Transaction Costs
African central banks are exploring the adoption of digital currencies to address the issue of high transaction costs. Traditional payment methods often involve intermediaries, leading to additional fees and delays. By leveraging digital currencies, financial transactions can be conducted more efficiently and at a lower cost, benefitting both individuals and businesses.
Moreover, digital currencies operate on decentralized networks, allowing for peer-to-peer transactions without intermediaries. This streamlined approach reduces processing fees while minimizing the time for completing transactions..
The potential of Central Bank Digital Currencies (CBDCs) in Africa is promising since it offers numerous benefits such as enhanced financial inclusion with greater control over monetary policy, low transaction cost, and mitigating currency volatility. Countries such as South Africa, Ghana and Nigeria have already run pilots on CBDCs
However, governments must address the risks and challenges of CBDC implementation. Improving digital infrastructure and investing in technical expertise are crucial steps in ensuring the successful rollout of CBDCs. Additionally, safeguarding data privacy and financial integrity will necessitate stronger national identification systems and cybersecurity measures.
By addressing these concerns, African central banks can pave the way for a more inclusive and resilient financial landscape in the digital age.